Correlated opportunities in the Swiss franc

Traders often seek repeated patterns or repetitive relationships that we can take advantage of for profit. These patterns exist across all markets and time frames, but some are more easily identified than others. One such exploitable pattern involves the Swiss franc and the U.S. dollar. This currency relationship typically repeats a certain move at least once a day during any given trading session.

The first step to understanding the relationship between the Swiss franc and the dollar is to examine the birth and evolution of the foreign currency. While it may seem unlikely that such ancient history has any impact on the intraday fluctuations in the 21st century, it does help us appreciate the connections between the Swiss and U.S. denominations.

Prior to 1798, Switzerland as a country was divided into cantons or provinces, each with its own currency. This is similar to the early history of America when the country operated under the Articles of Confederation and each state minted its own coin. Imagine how problematic that was for conducting interstate commerce.

In the Helvetic Republic, a late-18th century effort to bring Switzerland under united rule, a currency pegged to the French franc was created. France was the premier world power at that time. Initially, this common currency was equivalent to 6.75 grams of pure silver or 1.5 French francs. This effort only lasted a few years, however, before local currencies regained favor.

A generation later, in 1850, the Swiss Federal Constitution mandated that only the federal government would be allowed to mint money, replacing the local currencies. Initially, the Swiss franc was pegged to the French currency and then directly to silver before Switzerland joined the Bretton Woods system in 1945, pegging its value to the dollar.

Fundamental drivers

Today, the Swiss franc sees significant fluctuations vs. other currencies. Throughout 2011, it had massive appreciation as the dollar slid. The stronger Swiss franc was not good for Switzerland’s export economy, and the Swiss National Bank began targeting a value of 1.20 Swiss francs vs. one euro. The Swiss central bank would sell foreign currencies to achieve that rate. This is a common practice of central banks to keep their country’s products cheaper, and more attractive, overseas. Indeed, this is a cornerstone of Japan’s current so-called “Abenomics” principles.

In any case, the Swiss franc currently sells at or below the threshold of 1.20 euros. Most likely the reason for the mass appreciation was the Greek bailouts that occurred during that time. Most Europeans were concerned that the euro would devalue, and the Swiss franc always has been the emblem of stability. Be warned, however, this is not to say that such a devaluation couldn’t happen again. It’s the type of major market-moving event that currency traders always should anticipate.

Today, each tick on a Swiss franc futures contract at the CME Group is worth $12.50. Unto itself, this is quite appealing, and better than other currencies such as the Canadian dollar or the Australian dollar.